Profits up for RS Group but tougher conditions lie ahead

Like many of the end markets it serves, RS Group (RS1) is in a state of flux. For years, the company formerly known as Electrocomponents has been regarded as a well-run distributor, with a steady management team and an ability to regularly outperform analysts’ expectations.

Yet longstanding chief executive Lindsley Ruth stepped down after seven years at the helm of the company last December and after standing in for Ruth as acting chief executive for a second time, former chief financial officer David Egan departed earlier this month. He left after revealing “shortcomings of judgment” in terms of a personal relationship with a colleague.

None of this appears to have affected the company's results for its most recent financial year, where revenue grew by 17 per cent driven by the outperformance of its industrial products arm (although a favourable exchange rate also helped). The electronics arm grew by just 1 per cent as price rises offset volume declines.

Operating profit also grew by almost a quarter, with prices rising faster than its own cost of sales and strong growth experienced in its own-brand range.

Yet new chief executive Simon Pryce, who was previously head of Ultra Electronics, is facing a tougher operating climate.

Trading in the first seven weeks of its current financial year has weakened, with the company pointing to purchasing managers’ index data showing slowing industrial growth and competition for market share in electronics said to be “aggressive”.

The company said it remained “comfortable” with consensus forecasts for the current financial year of an adjusted operating profit of £390mn on sales of almost £3.12bn, suggesting some margin dilution. Moreover, this includes an expected contribution of around £20mn in operating profit from Distrelec, should the €365mn (£323mn) acquisition complete in July as expected, broker Shore Capital said.

Although RS Group’s shares have fallen to around 14 times FactSet consensus earnings, below their five-year average of 19, a reversion looks more likely through weaker earnings than a valuation upgrade. Hold.

Last IC View: Hold, 875p, 3 Nov 2022